Property Executives See Signs of Ebbing Growth in Economy

The United States has reached a decade-long economic expansion, the longest in the country's history, but real estate executives say the "end-of-cycle economy" is one of the top concerns facing the industry.

The potential winding down of the growing economy was the No. 5 issue highlighted this year in an annual survey of the Top 10 issues affecting real estate conducted by the Counselors of Real Estate, a Chicago-based industry group compiled of 1,100 real estate professionals throughout the world.

"We have a lot of positive signs, such as a record stock market and other indications that things still look good," said Julie Melander, chairwoman of the Counselors of Real Estate, in an interview. "But when you look at other things, you don't want to be lulled into complacency. Even though there are some good indicators, there are other indicators things might not be as good as they seem."

 Related News:  Real Estate Investors Ride Record US Economic Expansion

 Related News:  Las Vegas Apartments Ride US Economic Expansion to Lure Another High-End Investor

In the annual survey, which highlights comments from undisclosed "counselors," or industry group members, there seems to be a consensus, or at least concern, the economic boom is coming to an end.

“Real estate demand is derived from the economy, and there are many signs the expansion is coming to an end, probably by 2020," said one unidentified counselor in the survey. Another counselor agreed, adding, "Nothing will affect real estate more than the end of the cycle, which is fast approaching.”

Other top issues facing the industry, from infrastructure to housing to political division to public and private indebtedness, could become increasingly exacerbated by the challenges in the face of the end of an economic boom era. This week marks the milestone for the country's longest economic expansion of prosperity. The last recession ended in June 2009.

Right now, Melander said there seems to be a disconnect between property sellers and buyers as funds flood into the market, competing with traditional lenders, such as banks, which has possibly led to artificially inflated values fueled by that escalating competition for deals.

"The overall transaction volume is down with regard to property and equity transactions," said Melander, who is a private equity real estate investment counselor based in Florida. "There's a lot of aggressiveness on the debt capital side, which gives us a sign that buyers and sellers are not on the same page."

The economic expansion has increased speculative development from investors in non-traditional real estate and even apartment construction in some U.S. markets, which could prove painful for some late-stage projects, says one executive in the survey. Another industry group member said it seemed some "market participants" were "once again lacking discipline."

One of the outcomes expected by market conditions nearing the end of the economic cycle is rising interest rates, which Melander said is something real estate executives within her group are preparing for in the next 18 months. Rising interest rates can affect incomes and net cash flow as interest-rate expenses increase for property owners.

In limiting exposure to rising interest rates, Melander said executives can lock in low-fixed interest rates and dig into the details of their portfolio to gauge risk tied to potential exposure of expiring leases.

What else should real estate executives keep an eye on? Here's a ranking of the top real estate issues facing the industry:

1. Infrastructure: Without much-needed repairs within large cities, such as New York City and Washington, D.C., to roadways, bridges, the power grid, water and other systems, it will be difficult for these cities to continue to compete for corporate expansions and top talent.
2. Housing: The up-and-coming workforce in the country is grappling with finding affordable housing near job centers. The lack of affordable housing is tied to an unbalanced supply and demand stemming from the housing crisis a decade ago even as the younger members of the workforce juggle student loan debt, costs tied to inflation and low wage growth.
3. Weather and climate-related risk: The weather changes are impacting decisions by real estate investors, who need to weigh weather risks as insurance losses have made it difficult to cover properties, such as shoreline real estate, against certain risks, such as rising sea levels.
4. Technology: The ever-growing use of technology is making the location of a business less important, which in turn is affecting capital markets. Even as technology makes it easy for companies to operate anywhere, the threat of hackers and cyberattacks is something to watch. Innovation around mobility, something developers are playing an active role in, is also something the industry group is watching.
5. End-of-cycle economics: The complacency seen in the industry this year is in itself risky, with most macroeconomic indications indicating a robust economy. But there are some signs of an economic slowdown and the country could see a recession as early as 2020.
6. Political division: The Counselors of Real Estate isn't an advocacy organization, but it finds that political dysfunction in the country has eroded the international standing of the United States. Additional issues, such as tariffs, trade wars with once long-standing allies will have a significant impact on the broader economy, including real estate.
7. Capital market risk: Low interest rates have persisted, leading investors chasing yield to move down in credit despite broad economic concerns of where we are in the market.
8. Population migration: Population movement in search of prosperity tied to innovation has brought even more people to larger cities. U.S. population projections have been decelerated as a result of constrained immigration.
9. Volatility and confidence: Concerns of economic uncertainty has caused an impact on real estate buying. That lack of consumer confidence is trickling into home buying and other elements that fuel the economy.
10. Public and private indebtedness: With about $3 of debt for every $1 of U.S. investment property, there's a levered environment in the country. The federal deficit has widened with the tax cuts and increased spending on border security and military operations at a time of economic boom is concerning industry executives. Along with industry and public debt, the debt burden for U.S. households has also grown. One real estate counselor said, "The basis for the next collapse will be from debt defaults.”

Source: Counselors of Real Estate 2019 survey